This morning President Obama signed an executive order establishing a new, bipartisan “National Commission on Fiscal Responsibility and Reform” and made it clear that the commission would be welcome to suggest tax increases as part of their recommended policy mix for deficit reduction. And just a little later this morning, a desperate man crashed his small plane into an IRS building in Austin, Texas, because he was outraged about his high tax burden. (Read his suicide note here.)

NEW YORK (CNNMoney.com) — President Obama issued an executive order on Thursday that formally creates a bipartisan fiscal commission, a first step to forcing painful decisions needed to get the U.S. debt load under control.

Raising taxes, cutting spending and reforming Medicare and Social Security are all fair game, and thought to be impossible without the backing of both Republicans and Democrats.”Everything’s on the table. That’s how this thing is going to work,” the president said immediately after signing the order.

The commission must deliver a report to the president by Dec. 1 that makes recommendations for bringing annual deficits to no more than 3% of the size of the economy [by 2015]…

The commission will also be expected to suggest ways to permanently lower the country’s total debt…

The president formally named the two co-chairmen he has chosen for the commission: Alan Simpson, a former Republican senator from Wyoming, and Erskine Bowles, a Democrat who served as White House chief of staff under President Clinton.

He said the two men “are taking on the impossible: they’re going to try to restore reason to the fiscal debate.”…

Deficit hawks say that the country cannot adequately address the looming fiscal shortfalls without addressing both taxes and spending.

The presidentially-appointed commission might not be as “toothy” as a Congressionally-legislated commission, but (again, from the CNN story):

…there is a chance that recommendations from the presidential commission will be given serious consideration. Senate Majority Leader Harry Reid, D-Nev., and House Speaker Nancy Pelosi, D-Calif., have given their assurances — in writing — that they will bring the group’s recommendations to the floor for procedural votes before the end of the year. The House will only take them up, however, if they pass the Senate first.

Voting forthe commission’s recommendations will likely be a tough pill for both parties. But the idea behind a bipartisan panel is that it can give political cover to lawmakers since no recommendation can be made unless it has the support of 14 of the 18 commissioners.

Matt Miller has it right to emphasize that the toughest obstacle to establishing fiscal sustainability isn’t in figuring out the right economic policies, but rather in having the political will to see them through (emphasis added):

The good news from the Clinton experience is that the chronicle of debt foretold in Obama’s budget is perfectly consistent with a return to fiscal sanity much sooner. The bad news is that our bipartisan blend of fiscal dishonesty and political calculation has reached the point where it’s hard to know who will spark the debate we need about the real choices America faces.

Republicans act as if near-term deficits are a bad thing, when in fact the flood of spending both from the stimulus and the Federal Reserve’s creative liquidity injections brought the economy back from the brink. The new Republican “it” boy on fiscal policy, Rep. Paul Ryan of Wisconsin, indulges in the mathematical and political fantasy that we can keep taxes at their historic level of 19 percent of GDP while doubling the number of people on Social Security and Medicare.

Democrats, meanwhile, are boxed in by Obama’s unsustainable pledge not to raise taxes on Americans earning less than $250,000 — a policy that only “works” if we think we can borrow all the cash for the baby boomers’ retirement from China. Nor will Democrats explain to their liberal base that trimming Social Security benefits for better-off retirees will be a progressive way to fund better teachers for poor children in the era of permanent fiscal pressure ahead.

It’s such a surreal moment that admissions of cowardice somehow pass for evidence of fiscal rectitude. Whatever its merits — and let’s all wish it well — the very need for Obama’s new fiscal commission amounts to an extraordinary confession.

“We refuse to risk our hold on power,” our leaders are essentially telling us, “by coming clean on our own about the tax increases and spending cuts we know are needed to pass a sound nation to our children.” Thus “political leadership” becomes an oxymoron. Odds are we’ll fix the budget once enough of us show our leaders it’s safe to do what needs to be done…

Now, we who work at today’s Concord Coalition must still hold some degree of optimism on the being “better” part (or else why would we keep doing what we do); see our participation on this joint statement (with two other organizations) on the fiscal commission. But I have to admit that (the motive for) today’s plane crash in Austin, and the result of two recent polls on the willingness of Americans to make the tough choices to reduce the deficit, do challenge that optimism. First, a Rasmussen poll (discussed in further detail by Eric Kleefeld of Talking Points Memo) suggests that many Americans (particularly Republicans) would rather have budget deficits and tax cuts than a balanced budget with higher taxes. (Never mind that there’s no such thing as a “free” tax cut and that deficit-financed tax cuts just turn into much larger required tax increases in the future.) Additionally, a New York Times/CBS News poll that was cited in yesterday’s NYTimes article by Jackie Calmes told us that Americans believe Bush Administration policies are to blame for the large deficits but that they’re not willing to reduce the deficit by cutting health care or education or (even) military spending. One question Jackie did not report on was the following (#39): “The Obama administration has proposed letting the tax cuts passed in 2001 expire for households earning about $250,000 a year or more. This would increase federal income taxes for those people. Do you think this proposal is a good idea or a bad idea?” The responses: 62% said “good idea,” 31% said “bad idea,” and 7% said “don’t know.” But that is not surprising, because far more than 62% of the people are being asked about a tax increase on someone else.

So the question about the tax increase on the rich is not a very helpful one, because the response only reflects the perception suggested by the first (tongue-in-cheek) comment in the story about the Rasmussen poll:

I favor balancing the budget by raising everyone’s taxes but mine. I also want a magic pony.

All this empirical evidence on how much Americans understand the deficit (not very well) and what they want to do about it (nothing themselves, if they can help it) tells me that the first thing the President’s fiscal commission needs to do is to start getting out there and talking with real Americans, educating them about why we even need to worry about the budget deficit, and asking them about the (hard) choices they’re willing to make (or not). Once Americans better understand how deficits adversely affect the economy and hence impose broadly distributed costs on society, the question that needs to be asked is not just about the kind of broad-impact spending cuts and narrow-impact (only on the rich) tax increases people would be willing to see, but whether they’d be willing to see higher taxes as part of a deficit-reduction package, even if those taxes are their own. More specifically, if the President’s commission quickly comes to the realization that not raising taxes on households under $250,000 is NOT an option, would a majority of Americans still say “yes” to the survey question on the 2001 tax cuts if the income floor were struck from it?

Are we Americans indeed better than our leaders have (thus far) asked us to be?

58 Responses to “A First Assignment to the Fiscal Commission: Find Out If We Americans Are Indeed Better Than Our Leaders Ask Us to Be”

On Miller’s point on Ryan’s proposal, he’s being a bit disingenuous in his phrasing. The way I read Ryan’s plan, he is proposing decreasing the number of beneficiaries and reducing the quality of benefits by capping the payments at a rate lower than expected medical inflation. So the part of his plan that may be unreasonable is the rationing (people and benefits) not the cost estimate.

Some entitlement cuts are going to be necessary. I’m up for that, so long as there are also cuts to the Pentagon’s budget and a general acceptance that military interventions on the other side of the world always end up being about ten times as costly as the initial projection, and therefore one should think a little harder before voting “yes, send the Marines into [insert shithole here].”

I’m also ok with paying higher taxes, at least on a temporary (hah!) basis, to help close the gap and put us back on a sustainable path.

I’m pretty well off. Yet I think it’s in my interest to pay more taxes now. Why? Because when it all comes apart the the seams, who’s got the most to lose? PEOPLE WHO HAVE THINGS TO LOSE. In other words, me.

Bill Clinton’s team told the president in 1994 … that he couldn’t possibly seek to balance the budget any faster than in seven to 10 years. Reducing government demand more swiftly might capsize the economy! Three years later, the budget was in surplus and the economy was humming. The moral: Always balance the advice of experts with the counsel of common sense.

But Clinton did NOT balance the budget by “reducing government demand” swiftly or at all during that period, even in real terms (adjusted for inflation)? Federal spending in real terms increased during that period. So why would you offer that as an example of experts overestimating adverse effects and underestimating positive effects of a “swift reduction in government demand” when no such reduction occurred?

Also, even if there are examples of expert consensus being wrong, does that really mean that, when dealing with a very complex analytical matter, it’s sensible to attach equal weight to one’s “common sense” assumptions as one attaches to expert consensus?

Lastly, your point is that “The beginning of wisdom here is to remember that what ‘everyone knows’ about the economy often turns out to be wrong”, presumably implying that the economic consensus is that we shouldn’t be running large deficits as we try to recover from this recession, but the economic consensus (not 100% consensus, but a large majority) is the opposite — that we should indeed have been running large deficits during the recession and should now as well. So if your point is that we shouldn’t be inclined to defer to expert consensus, your point in this case would be that we should NOT be running large deficits now, but I assume that’s the opposite of point you intend to make. I wish folks who favor large stimulus spending would stop erecting this straw man, mischaracterizing “deficit hawks” in this way; all the advocacy groups focused on reducing our long-term fiscal imbalance have said that large deficits have been and are good policy to help us recover from this recession.

Re: reducing the quality of benefits by capping the payments at a rate lower than expected medical inflation. So the part of his plan that may be unreasonable is the rationing (people and benefits) not the cost estimate.

I don’t see Ryan’s plan as “rationing” unless the definition is broadened to mean that everything is “rationed” when suppliers limit what they are willing to give us based on what we are willing to pay (i.e., a functioning market, with supply, demand, and equilibrium quantity). Ryan’s plan caps (via voucher) how much of a subsidy each beneficiary will get toward the purchase of insurance, and then says “Now shop for insurance and decide how much you want to pay for how much coverage, within the constraint of your total cash available after covering bare necessities.” Some will be literally unable to pay more than the value of the voucher (and by literally, again I mean they cannot maintain bare necessities if they spare anything at all to purchase additional insurance coverage).

By contrast, for regular Medicare to spend less per beneficiary (without changing out-of-pocket percentage(s)) it would have to truly ration in some way or another, whether via direct denials of some requested treatments, via insurers, via fixed payments to providers, via lower fees to providers, etc.

I guess my point is that some individuals receive less health care (or pay more for it) under either outcome. TBH, I prefer the Ryan approach because it provides more degrees of freedom for the individual than does the slow the growth of medicare cost inflation approach.

My only point was Miller’s simplistic argument of “he’s going to cover twice as many people and hold the line on spending to GDP and that can’t happen” is wrong.

Like the plan or not, I’m pretty sure the math works on the spending side. In part because it’s so simple to budget. It takes the defined benefit (health care) and makes it a defined benefit (cash) in the form of a voucher. The latter is a lot easier to project and control than the former.

Coming back to the broader point, means testing is a far more equitable solution for both SS and Medicare than is across the board rationing or raising the age of eligibility.

I think many liberals are deeply afraid of means testing because they both think it will make people less likely to support the program over time and it will blur the line between SS/Medicare and “welfare”. TBH, I don’t get either argument but, as a consequence, I think the more likely solution is an increase in eligibility ages as opposed to means testing.

The sheer inequity of SS and Medicare is phenomenal. In the end, a good portion of what these programs do is subsidize intergenerational wealth transfer. It’s entirely unclear to me what the public benefit is of such transfers, particularly since the estate tax doesn’t hit most estates.

Re: there is a chance that recommendations from the presidential commission will be given serious consideration. Senate Majority Leader Harry Reid, D-Nev., and House Speaker Nancy Pelosi, D-Calif., have given their assurances — in writing — that they will bring the group’s recommendations to the floor for procedural votes before the end of the year. The House will only take them up, however, if they pass the Senate first.

I heard of these supposed “written assurances” when they were supposedly provided — to Senator Conrad, when the vote to raise the debt came after Senate rejection of the Conrad-Gregg commission. Has anyone seen these supposed written assurances? Are they available anywhere for public view? If so, someone please provide a link. Otherwise, we don’t know how absolute vs. conditional these “assurances” really are, what exactly they are committing to in terms of the nature of the vote (up/down?) and timing, and if they are worded to provide room for Pelosi or Reid (if the latter is still around next year) to wriggle out of it.

It is very important that Obama get Pelosi, Hoyer, Reid, and whomever would likely be his successor if he loses in November to step up to a lectern SOON (long before the public learns of ideological compromises the commission already considers minimal — e.g., some tax increases and some reduction in long-term seniors’ entitlement spending) and pledge to bring any recommendation — emphasis on ANY — to either an up/down vote or vote with amendments that are scored by some reasonable method as debt/GDP-neutral over time, and to do so within a short, specific period of time following the provision of the commission’s recommendation.

And the above should also be in writing as a clear, unconditional, explicit pledge — made public now.

Mankiw may be accurate in his cynicism, but I would prefer our legislators to care more about results than about who gets the credit or blame.

Here in California we have several years’ head start on the whole idea of deficit-closing grand compromises. Based on that history I can tell you exactly what will happen at the federal level.

The deal will contain several several types of tax increases and spending cuts. A large fraction of the package will be spending deferrals and revenue acceleration, creating an even larger gap in the following year or two. Politicians will congratulate themselves on finally resolving the problem.

Six months later, the gap will suddenly be rediscovered, bigger than ever. The process will repeat with another grand compromise.

By the third cycle of this, voters will no longer believe that increased taxes will solve anything.

I strongly suspect (and would be willing to wager) that the commission will propose relatively little in terms of specific spending reductions. The simple reason is they won’t need to.

Taking the OMB budget as a baseline, the commission only needs to cover about .75% of GDP in 2015. That will be relatively easy to do via some form of VAT or other tax increase. I know you agree that the target (3%) is unreasonable but that’s the target they have.

So if you want a guess at the outcome, I’ll give you one.

1. Extend the “spending freeze” to all discretionary spending. This saves you about $40 billion or .25% of GDP (using the CBO baseline forecast)

2. Enact a new tax (VAT or some variant). To get .5% of GDP in an economy that is 60ish percent Consumer spending, you need about a 1% VAT to close the gap. This will sound modest in the context of all of the rigamarole that’s going on.

4. Make noise about but don’t actually make any suggested changes in entitlement programs in the long term. Perhaps they will go as far as suggesting an increase in the eligibility age and allowing the SS taxes to further scale but I doubt it.

Note that 1-4 meets the letter of the ask that the President has put forward. It ignores a bunch of things but, as a package, it will be quite tolerable to the President and to (many) democrats.

I further expect that HCR will be entirely ignored by the commission as “in process”

1. No solution without tax increases is politically viable (he may be referring specifically to viability within the commission framework, but I would presume he would say the same outside that framework as well). He writes:what if you are conservative?… You can try to stick to your no-tax-increase position. The problem is that doing so would require spending cuts larger than are politically realistic. If I were king, I bet I could find sufficient spending cuts. But I am not expecting to be anointed any time soon. If the fiscal commission is going to succeed, tax increases will have to be part of the deal.

He does go on to either suggest or acknowledge the possibility that, for partisan purposes, Republicans might be better off forcing Obama to lay out a solution and take the political hit, but that doesn’t change assertion/implication #1 above: a solution without any tax increase is politically implausible.

2. Conservatives could find acceptable tax increases as long as they got in return policies per his enumerated list, saying “If the conservatives on the commission could achieve my five goals above, it might be a deal worth talking about.”

So it seems to me he’s saying/implying that there is a conceivable solution including tax increases that would be acceptable to conservatives, and that the alternative is to do nothing and continue on our fiscally irresponsible path. I would think (but can only really say I wish) it were a no-brainer for conservatives which to go for, unless they cling to the fantasy that if they just hold out against any tax increases a bit more, they’ll get their pure ideological solution.

I’ll second that demotion. Seems like bad news to me, too, and quite stupid, except perhaps if they intend to do it after they’ve already made very substantial progress in terms of each “side” accepting ideological compromises. Opening it up to cameras from the onset wouldn’t exactly be conducive to breaking through the obstinate partisan posturing that is one of the two great obstacles to a solution.

The other great obstacle is the general unwillingness of people across the ideological spectrum to accept sacrifices of the scale necessary to put us on track for a decent debt/GDP over the long term, regardless of how that overall magnitude of sacrifice is allocated; I don’t think even most conservatives would really be ok with deep enough cuts in Medicare and Social Security to avoid any tax increases, and I don’t think even most liberals would really be ok with tax increases of the scale necessary to avoid cuts in projected spending on entitlements and non-Defense discretionary spending).

So the challenge is to move public opinion vis a vis those two obstacles: substantial sacrifice in general, and ideological compromise. Obama must lead on this using the bully pulpit, along with P.R. by advocacy groups like Concord. CRFB, the Peterson Foundation, and the private commissions that are going to work in parallel with the official commission. Also beneficial would be the extent to which those players (Obama, private groups, the official commission itself, etc.) can enlist for the P.R. effort the active support of other influential individuals (at least influential with some segments) — e.g., Bayh, Voinovich, Gregg, Dole, etc. — covering as much of the political spectrum as possible.

Please see my post above. Interpreted literally, no massive changes are required because the President has reduced the challenge by roughly $500 billion by excluding interest on the debt from the calculation. There’s no particular reason, with that goal in mind, to make huge changes in policy to get there.

I increasingly believe that the commission will be able to relatively easily declare victory because Obama has moved the goal posts so close that you can’t miss.

Said differently, a deficit of only $586 billion in 2015 would constitute success for the commission. *sigh*

First, I believe the commission is tasked with developing and presenting a recommendation or set of recommendations that not only hits that target but also charts a fiscally sustainable course going well beyond 2015. But, to your point, I think there’s a good chance that the only recommendation (if there is one) that is achieved and that comes to a vote will be a plan that only hits the 2015 target. If I understand the arrangement correctly, getting the necessary commission supermajority of 14 votes would require the votes of at least 2 Republicans appointed by the Republican leadership and at least 4 Republicans in total (including the two appointed by Obama).

I haven’t looked at numbers myself, but if I understand your stated expectation, you expect them to come up with a plan that doesn’t do enough and that is 2/3 tax increase and 1/3 reduction in projected spending — Am I reading what you’ve said correctly? If so, it sounds like you’re saying they won’t do much on the spending side, but they also won’t do a heck of a lot on the tax increase (revenue) side either, other than in relative terms (vs. the tax increase portion).

Assuming your numbers are correct and assuming I’m understanding your prediction, I suppose your prediction is reasonable as far as what will end up coming to a vote (if anything). That said, I think there’s a more-than-insignificant chance (how that for confidence?) that the commission will also achieve a recommendation for the longer term that does not (at least initially) come to a vote; I assume the co-chairs and at least some serious members of the commission would be deeply disappointed with their work (i.e., would consider it mostly a failure) if they cannot achieve a recommendation that addresses the drivers of our long-term fiscal imbalance (Medicare, Social Security, Medicaid, and vastly insufficient revenues vs. plausible post-reduction future spending on those programs plus prudent Defense spending).

Apropos of my last comment, I just saw the following relevant sections of the executive order (h/t Bruce Bartlett at CG&G). Emphasis mine.

Sec. 4. Mission. The Commission is charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run. Specifically, the Commission shall propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015. This result is projected to stabilize the debt-to-GDP ratio at an acceptable level once the economy recovers. The magnitude and timing of the policy measures necessary to achieve this goal are subject to considerable uncertainty and will depend on the evolution of the economy. In addition, the Commission shall propose recommendations that meaningfully improve the long-run fiscal outlook, including changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures of the Federal Government.

Sec. 5. Reports.

(a) No later than December 1, 2010, the Commission shall vote on the approval of a final report containing a set of recommendations to achieve the mission set forth in section 4 of this order.(b) The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission.

So clearly they are tasked with addressing those long-term drivers of the fiscal imbalance. That said, it still seems possible to me that they will achieve a supermajority on only a plan for hitting the 2015 target (or that plus only addressing the longer-term in a minor way) or that they will also have achieve a recommendation that substantively addresses the longer-term but that only the 2015 plan (perhaps with a bit for the long term) will be brought to a vote by the Senate Majority Leader (and if passed, then brought to a vote in the House by Pelosi or — dare I hope? — Hoyer if somehow he replaces Pelosi as Speaker)

I read what you read; however, the language there is weak, particularly if you take the OMB hockey stick chart as your baseline.

We’ll see but I strongly suspect the long-term recommendations will amount to very little.

The short term recommendations just don’t ask enough of policy makers and it’s largely a timing thing.

For example, many of the President’s proposed revenue increases in his budget won’t happen but they are in the baseline for 2015. So the “most likely” deficit number is higher than the OMB or CBO forecast; however, it’s unlikely the commission will feel the need to use those as it develops its recommendations.

I’m not sure what relevance you are attaching to one baseline or another; a debt/GDP target is what it is. Are you just referring to how a recommendation will be described in terms of deficit and debt reduction and in terms of the proportions of the reduction coming from the spending vs. revenue sides?

Your concern about timing seems very valid and important to me, given the possibility for accounting gimmicks, potential new policies designed to have a greater adverse impact after 2015 (e.g., if the 10-year cost of healthcare “reform” is skewed toward the back end while incremental revenues and other so-called “offsets” are more evenly distributed), and the most important fact that the drivers of the long-term fiscal imbalance grow much stronger after 2015 (which means that if we want aim for a debt/GDP in 2025 or 2030 of, say, 60%, it would be less economically disruptive and the imposed sacrifices less acute (as the number of seniors increases) if we get debt/GDP lower than that 60% by, say, 2020 and allow a glide path up to 60% by 2030. Assuming a large portion of debt/GDP reduction would come from reducing projected entitlements spending per senior (reducing the number of beneficiaries via means testing and reducing spending per beneficiary), this second-stage upward glide path of debt/GDP would allow reductions that were less sharp than would be needed if we hit 60% by 2015 or 2020 and then tried to maintain it from that point through 2030 as the senior segment grew.

Thanks for elaboration. Re: your last point, true, and even if they see a longer-term recommendation as just as much in the spirit of their mission, agreement on a longer-term plan is more difficult (politically) for commission members both in terms of the total level of sacrifice to which you refer, and in terms of the magnitude of ideological compromise (even if the “pie” of sacrifice is divided the same way, the same relative portion means more of the ideologically least desirable types of sacrifices in absolute terms). And the same applies for getting to a vote, passing, and getting signed into law.

The main objective of this commission is to give politicians cover for raising taxes. Don’t expect any serious cuts in any major programs. Politicians like to reward their buddies and earmarks will continue to flourish. This commission is just to hoodwink the average Joe into coughing up more taxes for the politicians to squander.

The biggest problem with the Ryan proposal is that it does not balance the budge within fifty years (it does show a balanced budget in year 53). Nor does it reduce the budget deficit below 3% within thirty years (year 38).

The plan only works if you believe that discretionary spending (including defense) will be less than defense spending is now. Also, it pegs per person health care expenditures to inflation. This would be fine — if we stopped adding new medical procedures and improving the existing ones.

The plan also assumes that tax revenues will increase. In other words, the tax changes that he proposes are assumed to raise taxes. I don’t disagree with this. Simple reality says that current tax revenues can only support four programs: interest on the debt; defense; Social Security; Medicare. To balance the budget without raising taxes or cutting one of the last three (interest on the debt is not negotiable), we would have to eliminate programs like Medicaid, homeland security (including the FBI, CIA, DEA, ATF, etc.), unemployment insurance, congressional pay, the education department, the commerce department, the agriculture department, WIC, the national park system, etc.

Ryan says that it is important to present a credible deficit reduction plan. He is correct. Unfortunately, the “Roadmap for America’s Future” is not that plan. It does nothing to reduce the debt as a percentage of GDP for thirty-eight years (it may slow the rate of increase). It basically says to wait for the Baby Boomers to die so that the government numbers will work again.

A truly credible plan would balance the budget within ten years and get deficits under 3% of GDP within five. That’s the kind of plan that Greece has now. It makes immediate cuts, not promises of cuts that might occur in the future. Credibility is acting now, not pushing changes out thirty years.

Congress and this Administration has put the country on a course of reckless government spending that has mortgaged the future of all Americans especially future generations. The only way to fix this long term structural problem is to create a pro-growth atmosphere for business. To do this we must reduce taxes NOW. How many different taxes does a business or individual pay on a regular basis. We must eliminate number and complexity of all these taxes and reduce the tax burden.

We also need to eliminate much of the complexity of government regulation. How many different regulations does a business have to try to comply with? How many forms does a business fill out to comply with government regulations. All of that effort has a cost and the cost is very high. That inhibits growth and jobs.

How many government programs to help the poor and others are so riddled with paperwork and regulation that much of the money spent on them actually goes to pay for the paperwork and regulations. We need to greatly reduce the number and complexity of government programs and eliminate the ineffective ones.

Most of all we need to eliminate the dirty backroom politics and deal making. A law should be for one purpose without unrelated “pork” included to buy votes in the Congress. All bills and meetings should be held and debated with complete transparency.

We are witnessing the greatest intrusion into the private lives of individuals and business in history. It is time to take our government and Country back. VOTE THEM OUT!!!

I disagree in part with your assessment of the Ryan plan. You are right to point out its weakness as I have other places but you should also acknowledge its strength (that it does in fact address the long-term entitlement issue).

On taxes, it is better to say it is silent than to say that it commits to raising taxes. Ryan asked the CBO to score revenues at 19% of GDP and not evaluate that element of his plan and they did so. 19% is solidly in the middle of the historical range of taxes in this country. Yes revenues are a good bit lower than that today but much of that is recession driven rather than tax code driven.

I believe the Ryan plan combined with some more aggressive short-term measures on both the revenue and spending side could be a credible solution but it would require quite a lot of sacrifice to get there

You definitely chose the right name. Yes regulation is frustrating but to argue for lowering taxes in the current deficit environment is not reasonable. Even if you believe in the laffer curve in practice, it’s pretty unreasonable to argue we’re on the downward sloping part of the curve with current tax rates.

Reducing complexity and increasing efficiency are nice but won’t get the job done. I saw a number recently (I won’t find it quickly because I don’t remember where) that total government payrolls (including the military) were on the order of $600 billion. You can solve a $1.3 trillion problem on the back of efficiency although it certainly cannot hurt.

It is far more likely that a workable solution involves more taxes and less spending. Getting from here to there will be very challenging however

I was thinking of responding to Angry Mob with the same opening line I resisted in part because I didn’t want to turn off someone who perhaps (emphasis on perhaps) could be reasoned with, but (I must admit) also in part because I wanted to see if you would take him on re: tax cuts or let it slide. Glad to see you pushed back on tax cuts even though (I assume) your ideal would be minimal if any tax increases and an entirely or almost entirely spending-side solution. That’s a key distinction between “good” commenters in the blogosphere and the (more common) commenters who see everything as an ideologically partisan battle in which the first and most important rule is unity with all on one’s “side” and attacking those on the other “side”. When I’m participating on ideological echo chamber blogs I find that if I’m disputing some matter with one of the blog’s “our side” commenters, no matter how obviously invalid the factual assertions and no matter how obviously invalid the argumentation, no one else on that “side” will point out the error, much less say “Brooks is right on this one”. Call it a battle mindset, camaraderie, peer-pressure, whatever — it’s just all about whether someone is “with us or against us”, and anyone who isn’t with us must be against us. Anyway, I’m not surprised that you’re much better than that.

Thanks. I try not to be unreasonable when I can. As you probably know, while my preference would be to solve the problem all on the spending side, I can’t come up with a way to make the math work if balance is my target (unlike the President’s target). And I’m OK with tax increases if they come with real spending cuts and some kind of changes that make it likely that balance can be sustained in the medium to long term.

I was actually thinking about this on my walk to Starbucks this morning. I think the issue about controlling spending is much less about controlling spending than it is about managing our understanding of what the government in general (and the Federal government in particular is here to do).

At the founding, we clearly had a perception that the Federal government was only here to do what it must (defense, trade, and a few other things). Over a long period of time, that understanding changed to the point where we now find it acceptable and indeed desirable for the government to do many, many other things and almost all of these other things cost money.

Once you accept the proposition that government should do what it can “to promote the general welfare”, placing limitations on the government becomes a budgeting exercise. I think ultimately this approach must fail because a “whatever I can” mindset combined with a short election cycle and the ability to borrow a lot of money will always produce deficits.

Perhaps what is needed is an attempt to create a new understanding of government’s role in society without making it a debate about what the meaning of the Constitution is/was. My favorite example, although far from my only one, is transfer payments. What’s the logic for robbing Peter to pay Paul? Under what circumstances should that be acceptable? To what degree should any individual Peter be robbed? To what degree and for what period of time should any individual Paul be supported by forced taking?

Re: government confiscating someone’s property to transfer it to someone else (in effect), I do think that the presumption that an individual can keep all of his property (including new gross income) is a good (or at least reasonable) default — the starting point, with the burden of argument on those who want that property confiscated for that purpose (i.e, the burden is on them to make the case).

Perhaps the best argument is the “free rider” problem http://plato.stanford.edu/entries/free-rider/ For example, if we don’t compel everyone to pay taxes to fund our military, then from a purely selfish, rational perspective each person would NOT volunteer any of his money, since his incremental cost would exceed his incremental benefit (in terms of security, power, economic benefits from global stability and protecting vital interests, etc., whatever benefits come from a stronger rather than weaker military), because whatever amount he gives will have an infinitesimal impact on the strength of our military even the amount is great enough to cost a lot from his personal perspective. The result is a weaker military for all AND unfair funding (some contributing, some not) of a public good from which everyone benefits. It’s essentially the same as the “tragedy of the commons” dynamic, but the individual incentive is instead to refrain from participation.

Another argument can be moral hazard. Even though ultimately in a purely free country no one would ever be literally compelled to help you financially, if in reality we can reasonably presume that people would sacrifice some of their money rather than let you suffer in some way to some degree, there can be a legitimate argument that it is justifiable/preferable to confiscate some of your property (e.g., money) to fund some sort of “insurance” (literal or not) against that scenario in which you would very likely end up with funding from others. This “insurance” could be a public pension program (a real one, that is) that you are compelled to pay into (because if you end up old and poor, others in society will support you rather than watch you starve to death in the street, so to speak), or health insurance funded by a tax you must pay (essentially the same as an individual mandate, whether called a tax or a mandated purchase), or simply a social contract into which you are compelled to enter (and thus contribute to via taxes), a “safety net” per which you help those who are in bad shape and if you at some point end up in bad shape, others will help you (again, if the assumption is that others will feel personally “compelled” to help you then even if you don’t help others now, the argument is that it is justified/fairer to force you to help others now).

There is also the argument (for confiscation — i.e., forced taxation — in general, and arguably even for some transfer payments) that forcing broader/greater contributions to some effort or program will enable so much greater efficiency/effectiveness that it is justified. If everyone except you in our neighborhood has a very strong desire to fill and stack sandbags to prevent a rising river from flooding the neighborhood, and the difference between success and failure will be whether or not you contribute (lend) your shovel to the effort (as everyone else who owns a shovel is doing), and you don’t want your shovel used for some relatively insignificant reason, it could be justifiable for the rest of us to borrow and use your shovel against your wishes. I know I’m presenting a simpler, stronger example than is often the case, but I’m just illustrating the principle. I suppose there is some overlap between my point here and the “free rider” point, but my broader point here could also include greater efficiency due to economies of scale, lower administrative costs, etc., from universal/broader contributions.

There is also the pragmatic argument per the observation made, among other places, in Durant & Durant’s Lessons of History which I recommend, that the wealthy/wealthier essentially fork over some of their wealth in order to prevent some more radical revolution that could cost them much more financially and perhaps bodily, and perhaps in other ways as well (e.g., liberty in general).

But all that said, I think much of the rationale (stated or not; fully real or partly/fully rationalization*) for taxation for the purpose of transfer payments probably comes down to an imposition of morality on those who one (or the majority) believes will not freely “do the right thing”. To present another extreme example just to illustrate the point: Suppose you and I are among a group of people (who have had no relationship and have no implicit or explicit obligations to one another) shipwrecked on a tiny island. We have good reason to expect we’ll be rescued within a particular period of time, and our only food source is food that belongs to you (it drifted ashore) and that will, if shared sufficiently, almost certainly enable all of us to survive until we are rescued. However, you decide that, rather than sharing any of it, you want to eat in abundance throughout this period, even though that means everyone else will almost surely starve to death. I would say it’s justifiable to force you to share the food.

I may have left out some arguments, but those are the ones that occur to me off-hand.

Oh, and re: the “free rider” and “public good” point, although that usually pertains to taxation for purposes other than transfer payments, sometimes the point applies to transfer payments or spending that is, in effect, transfer payments. For example, food stamps and other income support, education, healthcare, etc. for the poor could mean lower crime, and lower crime has a broad benefit.

Re: while my preference would be to solve the problem all on the spending side, I can’t come up with a way to make the math work if balance is my target

Do you mean that you can’t get to balance without cutting spending so deeply that you’d rather have some increase in taxation? Or do you mean you’d prefer to solve it all on the spending side, but don’t consider it politically achievable?

I’d prefer all things equal to do it on the spending side but I think what is required would never be possible politically. As to the question of whether I’d be ok with the outcome, it’s a good one. I haven’t done a hard look at it but I suspect I’d be hard pressed to solve the problem solely on the spending side in ways I consider appropriate. The gap has simply become too large for that to be an achievable solution.

Thanks for the arguments above on the rationale for confiscation. I’m pretty familiar with most and, interestingly, I have much more of a problem with the Rob Peter to pay Paul solution than with the rob them both to pay for good or service X that they might not sufficiently fund on their own.

In this context, the free rider justification is not so relevant. Your other arguments are basically different views on distributional equity as a justification. Distributional equity can justify the transfer if Paul is wealthier than Peter to begin with but in the particular case, that’s not true. Seniors are the wealthiest part of our society and yet almost all of our monetary transfers go to seniors.

It really seems to me very challenging to justify on any rational basis.

I’m still unclear. It sounds at first like you’re saying your ideal would be spending-side-only but that it wouldn’t be politically possible, but then you seem to say that you wouldn’t consider spending-side only appropriate. If it were politically possible, would your ideal be spending-side-only or would you consider that “inappropriate” (or both on some basis)?

Also, you mentioned “getting to balance”. Do you mean a balanced budget by a particular year (2015? 2020?) or something else?

Second question first. I think we need to get to a balanced budget in a reasonable term. Given the economy, I think the best we could hope for is sometime between 2015 and 2020.

As to the first question, I’m not sure. I know it isn’t politically plausible and I suspect (but haven’t fully investigated) that the tradeoffs required would not be ones I would make even if I had the power to make them.

In the end, it depends on how deeply I was willing to attack transfer payments. I’m quite comfortable with a 20 percent reduction based on the relative wealth of the two populations in question. Balance would require much more and maybe too much entirely. It’s a good thing to take a look at though.

Thanks for the explanation. Re: “the relative wealth of the two populations” involved in transfer payments, do you mean seniors vs. non-seniors, or relatively poor vs. middle/high income (or something else)?

Interesting juxtaposition today of Alexander Haig’s death and Ron Paul winning the CPAC straw poll for desired Republican presidential nominee in 2012, given how strikingly different their respective brands of conservatism with regard to the projection of military power.

(By “interesting” I mean no disrespect toward a man who died today, let alone an American with a distinguished record of military service).

Look at it this way. The median net worth of the top quintile of senior households by earnings is $500,000 (this is the only data I’ve been able to find so far). The median net worth of all non-senior households in on the order of $50,000. So the question is why do those seniors in the top quintile collect money from people with so much less wealth than they have.

Said differently, this top quintile of HHs could probably pay their own way for 10 to 15 years on average with no negative impact other than leaving less to their heirs (which it is unclear we as a society have much of an interest in)

Another shocking (to me) statistic is that median net worth increases by age cohort within the senior population. In the working age population, this makes sense, but it makes a lot less sense in the senior population since most are not working and therefore have no earnings with which to build there net worth. The explanation appears to be that we as a society are subsidizing the maintenance and, in some cases, growth of senior net worth.

I say this as someone who luckily is in the top quintile although not yet a senior so I have no personal interest in taking this position.

Admittedly, I haven’t seen any data post2006 butI doubt the picture has changed radically.

Against this backdrop, I’d argue that raising the retirement age is less efficient and less effective than means testing. Less efficient because some portion of the population now excluded by the higher retirement age will use other forms of public assistance. Less effective because a means test seems much more viable for rapid enactment because of the very fact that the people in question can pay for themselves.

The more I look into it, the more it seems that SS and Medicare are, in part, very inefficient ways of ensuring some level of intergenerational wealth transfer.

In my opinion, net worth is misleading unless it includes the present value of all defined benefit income. Ideally that should include Social Security and the expected value (cohort average) of Medicare.

Just a bit more data that I’ve been able to dig up on the issue of SS and Medicare. The average net worth for people over the age of 65 is $833,000 (data from the Fed and the census). The average for people under 65 is $487,000. So clearly the right solution is to transfer money from the second group to the first.

I multiplied HH times the averages and regrouped the data to get at the over and under 65 estimates.

If you look at medians, seniors in various groups are over 200k and the nonsenior population is around 50k. The probably is the math is much tricker using medians since you need the raw data to do the analysis.

It actually doesn’t matter which way you do it, it’s a transfer from the less wealthy to the more wealthy.

Well, the politics is simplicity itself — seniors have a far higher voter and political participation rate than others — but it *is* extraordinary when one compares the justifying mythology to the reality.

If one looks at the data by age group, including disposable income, it is much more stark.

The poorest — by both income and wealth — are of course the young, who *also* have the largest family obligations, the cost of raising kids and the rest … with medical costs coming out of their paychecks one way or another. This makes their disposable income per person yet smaller. These are the ones paying the income transfer.

The richest as you note are the old. But they also have the smallest households. In the 50s and 60s their income tops off, they are the richest of all people, after that because their households are so small they maintain high disposable income per person as their income glides down … *and* they have the wealth to cash in if they want, *and* they have their medical bills covered and receive SS income.

Eg., some old numbers I had in my files, from the Fed 1998 Survey of Consumer Finances (oldish, but you’d get the same general pattern today):

These wealth numbers do not include the capitalized value of Mediare and SS, which typically are hundreds of thousands of dollars at age 65. Yet more real wealth for the old.

I have the corresponding income/consumption numbers somewhere, they give pretty much the same picture.

In *real time* SS and Medicare on the whole are unambiguously poor-pay-to-rich transfer programs.

The mythological justification for this regressiveness is that in time the young will become old and “get theirs” in return.

But in reality that ain’t so — the SS Trustees tell us today’s young are going to be taking a $16 trillion loss on SS alone (re Medicare, only the gods know), this poor-to-rich transfer isn’t going to be paid back.

As far as the famous “Intergenerational Compact” goes, whoever the laywer is who represented the young is going to open to a heck of a malpractice suit of they ever catch him.

OK, as to income and expenditures by age group, here are some numbers I took and figured from the BLS Consumer Expenditure Survey for 2008, for representative age groups (”young”, “child raisers”, “retirees”)

Numbers are for age of “unit head”, number of persons in unit, income and expenditures.

I then figured per person income, expenditures, and expenditures on entertainment and away-from-home food (”food&fun”).

We again see that per capita income, expenditures, and “food&fun” are highest for the oldest group — as is wealth from the other surveys.

I just looked further, and in fairness to Jim, upthread he did seem to be making the point that he was contrasting the lower income and wealth of “the young, who *also* have the largest family obligations, the cost of raising kids and the rest … with medical costs coming out of their paychecks one way or another. This makes their disposable income per person yet smaller. These are the ones paying the income transfer.” And Jim also notes upfront that “The richest as you note are the old. But they also have the smallest households. In the 50s and 60s their income tops off, they are the richest of all people, after that because their households are so small they maintain high disposable income per person as their income glides down … *and* they have the wealth to cash in if they want, *and* they have their medical bills covered and receive SS income.”

And then even in introducing those data (with the omitted age brackets), he says “here are some numbers I took and figured from the BLS Consumer Expenditure Survey for 2008, for representative age groups (”young”, “child raisers”, “retirees”)”. So I jumped the gun a bit after seeing Arne’s charge elsewhere that Jim was being deliberately misleading. That said, I still think it was inappropriate to leave out those data, and I still wonder if they were left out deliberately to cherry-pick the age groups that make his point look strongest.

So to your hypothesis Brooks, income per person is higher between 45 and 64 than it is over 65 but net worth per person is substantially higher for the over 65 than for any group other than the 55-64 (some of whom are already retired). Net worth number are the same at the bottom because the fed numbers only report under 35 in one group.

An additional piece of information from the BLS that was interesting is the following

Note this would exclude Medicare/Medicaid since neither is a direct payment. This would suggest that the higher income number for 55 to 64 year olds is at least partially driven by increases in Federal payments to folks.

Keep in mind, the HHs under 45 which are clearly worse off than senior HHs on BOTH income and net worth are 42.5% of all HHs and probably about 55 percent of HHs paying SS and Medicare taxes.

The broad point that there is a major subsidy from the have nots to the haves remains. This point would be further amplified if we looks at only the top quintile or decile of senior households who receive benefits from all of the other households in the US

By the way, it further suggests that the mean senior (recognizing no such person exists) could cover their SS and Medicare costs for a good chunk of time if they were required to do so.

Look at it this way. Assume these people were required to cover SS and Medicare costs and nothing else changed.

An average senior with net worth per person of $563,000 would cover their own SS $12600 per year and Medicare (average about $10000).

If nothing else changed, their net worth would decline by roughly $226,000 over 10 years ($12600 plus $10000 times 10) reducing the average over 75 to $200,000 per person which is still higher than the average for all HHs under the age of 55 by a good margin.

I’ve posted the median data in other places. How exactly does it support a different point of view? It makes exactly the same point, on a median basis seniors have more net worth than anyone else and are the recipients of money from everyone else.

Do you see it differently based on your link?

Further, it is not as if it’s a proposal to cancel all transfer payments. Take a look at the top quintile or quartile of seniors with net worth exceeding $500K. Why should they receive payments from the rest of society exactly?

Median wealth in $K
45-54 185.0
55-64 253.7
65-74 239.4
over75 213.2
See the chart I posted. Median wealth increases until age 65 and then decreases. In point of fact, until 2007, the same was true of mean wealth.

Because I linked to all the data, and having done that saw no need to reprint pages of BLS data in comments here.

The points to be made are very clear from the data for the sample groups I gave:

(1) There is a financial life cycle “arc”, from (a) low income and borrowing, with expenditures exceeding income [to pay for one's own education, buy a home, finance kids, etc]; to (b) higher income with saving, to pay down past-incurred debt and save for future retirement; to (c) gradual spending down of income and saved wealth.

Sit back, look at the three number sets, anyone ought to be able to see in one’s mind the whole arc from ages 18 to 85. (Or those who lack imagination can just follow the link to the data.)

(2) By ANY measure, as a class the over-65ers are far better off income, wealth and consumption-wise — consumption is the key to quality of life, it is what wealth provides for — than the under-25-year olds.

This continues clearly through the 44-year olds. Especially when one considers changing household size, “per capita” measures, and the extra responsibility of the young — they have to pay for children’s lives, education, medical costs. They don’t get their medical costs picked up by the govt.

Yet the 12.4% payroll tax is being paid by them, the younger poorer generations, from their first-dollar of wages, even when they are too poor to owe income tax, as a real-time transfer to the higher-income, greater wealth-possessing older generation.

And these younger people are never going to get this back in turn — the SS Trustees say they are going to take a $16 trillion inter-generational loss on this transfer via SS. (And who can know how big it will be for Medicare)?

That was the issue under discussion — and here is the plain fact of it.

Arne claims elsewhere that the BLS income figures for 45-54 and for 55-64 are higher than those for 65-74

You mean like I wrote:

“In the 50s and 60s their income tops off, they are the richest of all people.”

Maybe he got that from me? Read before criticizing, guys.

“I still wonder if they were left out deliberately to cherry-pick the age groups”

That’s right, I wrote that people in their 50s and 60s “are the richest of all people” to dishonestly hide the fact.

Keep up the knee-jerk belief in the dishonesty of others and you can become a Krugman of the blog-comments-o-sphere. (Without the Nobel or Clark.)

Median wealth increases until age 65 and then decreases. In point of fact, until 2007, the same was true of mean wealth.

Arne, wealth is supposed to decline in latter years. Savings are saved during working years to consume during later non-working years — you know, when driving around seeing the country in your RV or sailing of on your yacht into early retirement.

If your wealth doesn’t decline during retirement you truly are living entirely at other peoples’ expense!

Note again how household size declines during retirement, and life expectancy over which wealth is to be consumed also declines. This means that in retiree households, per capita, per year, any given amount of wealth actually gives greater and greater consumption power. Really, it is supposed to be declining.

As to the overall picture, SteveinCH has it correctly.

There is absolutely no “progressive” rationale for making real-time transfers from the working poor to the top quintile (at least) of retirees.

I mean, Warren Buffetts’ employees at Dairy Queen pay 12.4% payroll tax from their first dollar of wages to pay him extra retirement income and cover his medical expenses. What’s “progressive” about that? In fact, what’s not regressive about it?

And circa 2025 or so, when taxes have to go up across-the-board in a serious way to pay for Warren’s nursing home care and Bill Gates’ Social Security and Medicare, voters will realize it.